What is the global financial crisis, and who is it a crisis for?

Topics: Subprime mortgage crisis, Alan Greenspan, Citigroup Pages: 5 (1193 words) Published: May 25, 2014
What is the global financial crisis, and who is it a crisis for?

1.0 Introduction
The global financial crisis broke out in 2008 was most serious since the 1930s, it deeply affected various aspects and brought significant losses. Analyzing what is the global financial crisis, and who it is the crisis for has a important practical significance. 2.0 Causes

Reasons for the outbreak of the global financial crisis are reflected in the following aspects. 2.1 Real estate bubble
The global financial crisis ultimately triggered by the U.S. subprime crisis arising from the burst of the real estate bubble in 2008, and the birth of the real estate bubble is not only related to the "consumption culture" of American society, but also directly connected with the improper real estate and financial policies, as well as the long-term maintenance of accommodative monetary environment in the U.S. Monetary expansion and low interest rate environment reduce borrowing costs, prompting American people to swarm into the real estate field. When cyclical downturn of the economy began, interest rate increased, house prices fell, the bubble was shattered, default rates of low credit class first of all increased significantly, which led to the subprime crisis (Crotty, 2009). 2.2 Defects in financial regulation

Before eruption of the crisis, there are nearly 10 departments or organizations which are in charge of financial regulation, including the federal and state governments, the Federal Reserve Board (FRB), Office of Comptroller of Currency (OCC), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), and so on. Admittedly, the regulatory regime was a solid foundation for the development and prosperity of the American financial industry. However, with the development of financial globalization and financial innovation, the drawbacks of the U.S. financial regulatory system gradually reflected, and eventually became one of the causes of the financial crisis. Firstly, the most prominent drawback is that there are too many regulatory systems and agencies in the U.S., their authorities overlap mutually, resulting in a blind spot in monitoring. For example, considering financial derivative products such as Collateralized Debt Obligation (CDO), Credit Default Swap (CDS), it is not definite about whether it is FRB, OTS or SEC, which should in the end manage them. Secondly, various regulatory principles are developed fine increasingly, in ensuring the accuracy of the regulatory supervision, it is at the expense of efficiency, the speed of response to market changes becomes more and more slow. Finally, there are too many regulatory systems, making there is no institution with sufficient legal authority to be responsible for the risk of the entire financial market and financial system, the best timing of regulatory is often lost because of waiting for the approval or meetings (Milberg, 2009). 2.3 Excessive innovation

This global financial crisis caused by securitization of the U.S. subprime mortgage credit debt, Fannie Mae, Freddie Mac were through asset securitization to issue bonds in the market to attract investment banks and other financial institutions to buy. Investment banks reused financial engineering techniques to sell the bonds. After this series of innovations, it covered up the huge risk of financial derivatives, more and more investors in the U.S. and overseas were involved in the purchase. The risk of the U.S. real estate bubble spread to the globe with the financial derivatives, and finally the U.S. subprime mortgage crisis spread to the world to form a global financial crisis (Barrell, Hurst and Kirby, 2008). 2.4 Defects in credit rating system

Objectivity and impartiality of credit rating agencies directly affect the safety of the financial risk early warning system and the whole credit system. The U.S. credit rating companies’ revenue are from the rating targets,...

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